Continental Aktiengesellschaft (CON) Earnings Call Transcript & Summary

Dear ladies and gentlemen, welcome to the Conference Call of Continental Regarding the Results Q3 2021. At our customers' request, this conference will be recorded. [Operator Instructions] May I now hand you over to Bernard Wang, who will lead you through this conference. Please go ahead.

Thank you, operator. Welcome, everyone, to our Q3 2021 results presentation. Today's call is hosted by our CFO, Wolfgang Schafer. Also here in the room with us is Stefan Scholz, Head of Finance and Treasury. If you have not done so already, the press release and presentation of today's call are available for download on our Investor Relations website. Before starting, we'd like to remind everyone that this conference call is for investors and analysts only. If you do not belong to either of these groups, please kindly disconnect now. Following the presentation, we will conduct a Q&A session for sell-side analysts only. [Operator Instructions]With this, let me now hand you over to Wolfgang.

Thank you, Bernard. Let me begin today's presentation on Slide 3. Two major events in the execution of the group's strategy occurred in the third quarter. First, the spin-off of Vitesco Technologies was successfully completed and its listing in Frankfurt took place on September 16. And second, we announced that we are realigning our structure to accelerate the strategic transformation of the company. I will cover this in more detail shortly. While we are confident that the strategic changes will help us fulfill our mid- and long-term ambitions, in the near-term, operational situation is more challenging. Starting in automotive, managing the semiconductor shortage remains the dominant task with the recent pandemic surge in Southeast Asia further exacerbating the already tight situation. The resulting effect on reduced vehicle production volumes, supply chain costs, and operational inefficiencies are clearly visible in our Q3 figures. On the flip side, the development of future business remains healthy as we booked EUR 4.8 billion of new wins in the quarter, taking the year-to-year date -- year-to-date order intake total to about EUR 13 billion. The Rubber Group felt the semiconductor shortage through negative volume development in OE-related business. However, tires and ContiTech were better able to compensate by leveraging the favorable market environment for replacement tires as well as the positive developments in industry and aftermarket business. Now switching to our current priorities on the right side of this chart. While we do believe the worst of the semiconductor shortage is behind us, the situation in Q4 and also in 2022 will stay demanding. Indeed, sales to OE customers in October are only incrementally better than they were in September. The effect of cost inflation, especially for electronics and electromechanical components are increasingly being felt in our figures. While we are working with both suppliers and customers to define and implement mitigation measures, we do not expect offsets to become effective until next year. Aside from components, cost for other inputs, including raw materials, energy and logistics are also stepping up. These factors are all reflected in the updated outlook we issued on October 22. Regarding technology, we are making further progress on our strategic priorities in advanced driver assistance systems and sustainability. In automotive, we finalized our joint venture with Horizon Robotics that covers, not only hardware and software for AI and autonomous driving, but also includes a memorandum of understanding between our joint venture; and Elektrobit for standardized software solutions for vehicle infrastructures. Tires, we premiered our green concept tire at the IAA Munich as a demonstration, not only of our technological capabilities but also of our strong commitment to sustainability. I'll come back to this on the next but one slide. Moving now to Slide 4. Back at our Capital Markets Day in December, we presented our company strategy based on clear strategies for each group sector. With our organizational realignment, we adapt our organization as well as reporting structure to the strategy -- structure for the strategy to increase the speed of our transformation as well as to increase transparency. While our organization will already be transitioning to the new structure starting in January, for reporting purposes, the transition will be done in 2 steps. First, starting 2022, ContiTech and Tires will report and provide outlooks as independent group sectors, joining automotive and contract manufacturing. For automotive, we will provide disclosure for 3 business areas: vehicle networking and information, as it is today; and safety and motion; and autonomous mobility. Starting in '23, we will add more detailed disclosures regarding VNI. We are implementing these changes so that all stakeholders can more transparently follow our progress and transformation. Continuing on Slide 5 in our Continental GreenConcept as shown at the auto show in Munich. The innovative tire features current and future technologies and underlines our strong commitment to the clean mobility of the future. It minimizes resource consumption throughout the entire value chain. It is made from renewable materials, like natural rubber from dandelion, silicate from rice husk ashes as well as vegetable oils and resins, plus it contains a high share of recycled materials, reusing everything from PET bottles and rubber from worn tires to reduce the amount of virgin raw materials needed for tire production. The 52% share in renewable and recycled materials used is a big step towards our ultimate goal to switch all our tire production to sustainable materials by 2050 at the latest. Thanks to an optimized tread pattern, a new type of casing structure, and a special sidewall and weight-optimized bed. The Conti GreenConcept tire, not only uses less material, but it's also up to 40% lighter than today's standard tires. The GreenConcept is also capable of being retreaded multiple times, further helping to save on materials and investment. At the same time, reduced rolling resistance increases range and efficiency by an impressive 25%, again, the tough Label-A requirements. In addition to the GreenConcept tire, Continental equipped the ID, live presented on the motor show by Volkswagen with a special eco-friendly tire, which is ready to make its way into serious production in the near future. This tire is based on our existing standard, EcoContact 6, and will soon be available on new vehicles and later also in the aftermarket. Let me now shift to our financial highlights, starting on Slide 6. Unless indicated, all figures are shown for continuing operations. Reported sales came in at EUR 8 billion, 7.4% below the reported figure from Q3 2020 and organically down by 8.5%. Due to lower volumes and increasing cost headwinds, adjusted EBIT decreased year-on-year by over EUR 300 million, resulting in an adjusted EBIT margin of 5.2%. Special effects totaled positive EUR 38 million, mainly driven by carve-out-related effects and relief of restructuring reserves. Net income after taxes attributable to shareholders achieved EUR 309 million. The strong increase versus prior year is mostly attributable to the impairment booked in Q3 2020. Trailing ROCE was at 10.5%. Free cash flow for continuing and discontinued operations and excluding acquisitions, divestitures, and carve-out effects came in at EUR 12 million. I will cover cash flow in detail on a later slide. Due to the Vitesco spin-off, the clear comparison to the prior year figures for the gearing and equity ratios is not applicable. However, the post spin-off figures as shown on this chart show that these metrics remain within the target ranges we communicated back at our Capital Markets Day last year. Post spin-off net debt was just under EUR 4 billion, a level in line with our commitment to sustaining an investment-grade credit profile. And let me now move on to the performance by group sector, starting on the next slide, Slide 7. In Automotive Technologies, we saw a sizable year-on-year organic decline by 17% caused by the semiconductor shortage, about 3 percentage points ahead of global vehicle production as shown on the following slide. Due to the volume decline and supply chain costs, the adjusted EBIT margin dropped to negative 2.3%. In Rubber Technologies, sales grew organically over the prior year by 0.5%. Pricing and mix compensated for lower OE volumes. In terms of profitability, while our pricing and cost-saving initiatives were helpful, they were not able to counterbalance the sizable raw material headwinds of about EUR 225 million in the quarter, resulting in an adjusted EBIT margin of 11.3%. I'll proceed to Slide 8, showing our regional outperformance in automotive. Weighted by regional share, automotive sales were about 700 basis points, above the light vehicle production in Q3 2021. Our performance was very significant in Europe, supported by a strong aftermarket business for commercial vehicles and services and by higher content per vehicle as our customers optimize their product mix. In China and North America, our sales development was roughly in line with regional products. Let me now move through the individual businesses, starting on Slide 9, with AMS. Sales came in at EUR 1.6 billion, a year-on-year organic decline of 21%. All product areas had the volume impact of the semiconductor shortage especially advanced driver assistance systems and hydraulic braking at European and North American customers. In addition to these reduced volumes, higher year-on-year premium freight charges of around EUR 25 million, price increases of semiconductors, and operational inefficiencies caused by demand volatility affected the adjusted EBIT margin, which was minus 1.7%. The margin does include a positive effect of around EUR 30 million related to the spin-off. Additional ADAS R&D increased year-on-year by about EUR 30 million in Q3 and by about EUR 70 million in the first 9 months. As a reminder, we have revised our expected increase in advanced driver assistance systems R&D to about EUR 100 million to EUR 150 million for the full year. Despite customers continuing to delay their sourcing decisions due to market uncertainties, AMS recorded an order intake of EUR 2.7 billion in the quarter. The biggest order wins were related to electronic brake systems, most notably for the MK C2 One Box. Next slide is VNI. Just as in AMS, the semiconductor constraints affected sales in all product areas of VNI. Only commercial vehicle and services, which is the core of our smart mobility activities for fleets and in the aftermarket, recorded year-on-year growth despite the chip shortage. This boost allowed VNI with its overall organic decline of 13% to significantly outperform vehicle production. The adjusted EBIT margin declined to minus 2.9% and in AMS. Major drivers for this unsatisfying number are lower volumes, supply chain costs, including premium freight of around EUR 25 million as well as operational inefficiency. Also for certain AMS, this year's figure includes a positive effect from the spin-off of around EUR 30 million. VNI recorded again a solid order intake of EUR 2.1 billion, including more than EUR 1 billion for panorama display solution employing OLED technology for a premium volume vehicle with start of production in 2023. Organic growth in tires to the next page, area and -- the organic growth in the tire business area was 2.5% versus the year-ago period. Volumes decreased by 5.5% due to the weak OE demand on the one hand side and strong demand for truck and passenger car replacement tires in North America and China on the other hand side. The latter ones continue to be ahead of 2019 levels. Replacement volumes in EMEA surpassed prior year but did not fully achieve 2019 levels. Price/mix improved by 8%, reflecting the ongoing favorable business environment, particularly in EMEA and the Americas. Roughly half of the figure is attributable to price, which accelerated sequentially versus Q2 and should sequentially improve again in Q4. The mix contribution makes up the other half, specifically driven by a higher share of ultra-high-performance tires. Despite the strong contribution from pricing and mix, the adjusted EBIT declined year-on-year by 340 basis points, mainly due to cost increases in raw materials of EUR 150 million. Cost increases related to energy and logistics were minimal in Q3 but are expected to be more material in Q4. ContiTech sales, as shown on the next slide, organically declined by 4%, reflecting the impact of lower vehicle production on its roughly 50% OE share of sales. In contrast, industrial and aftermarket were more excited, with Surface Solutions and Power Transmission recording solid growth. Besides the lower volumes, profitability was influenced by raw material headwinds of about EUR 75 million as well as operational inefficiencies from volatile demand. While we were able to partially compensate for this through pricing activities as well as capacity adjustments, the margin decreased to 6.2%. We expect these elements to influence profitability in Q4 as well. Also just as in tires, we anticipate energy and logistics headwinds to be more strongly felt. Slide 13 provides an overview of the cash flow in Q3 versus the prior year. For comparability as well as transparency, we have adapted our cash flow reporting and 2021 outlook to reflect the free cash flow contribution from discontinued operations of about EUR 300 million. Compared to the EUR 2.2 billion figure, last year, operating cash flow in Q3, this year was significantly lower at EUR 478 million. However, the prior-year figure benefited from the reversal of the working capital effect. And in contrast, working capital was a cash flow burn this year, specifically due to inventories that are higher than normal seasonality. In Q3, working capital excluding the contract manufacturing increased by EUR 530 million. This reflects both higher raw material prices and higher inventories carried as the mitigation measures to supply chain challenges. We expect that these higher numbers and factors will also be visible in the inventory figure at the end of the year and only will reverse when the semiconductor shortage is over. The operating cash flow also includes cash outflows for restructuring of EUR 66 million. Year-to-date, cash outflows for restructuring were EUR 192 million. The expected total for the full year is about EUR 350 million. Excluding the cash inflow from -- of EUR 125 million resulting from the sale of a minority stake in a financial investment, investing cash flow was only slightly higher than last year. While we expect CapEx to step up in Q4, we have lowered our expected investment for the year down to 6% of sales. Summed up, free cash flow for acquisitions, divestment, and carve-out effect was EUR 12 million. Continuing now on Slide 14 with our market overview. As explained in our prerelease, given the ongoing constraints related to semiconductor components as well as uncertainties related to the supply chain and in customer demand, we revised down our expectation for year-on-year global light vehicle production to minus 1% -- to minus plus 1%. This considers not only the severe volume impact in Q3 but also the uncertain environment we are seeing in Q4. The same factors also influenced our reduced expectations for commercial vehicle production. For replacement tires, we slightly increased our forecast due to the ongoing favorable market environment, though we do expect growth rates to come down in the fourth quarter as comps get tougher. Let me conclude today's presentation with our updated outlook on Slide 15. Unless otherwise indicated, all the parameters shown here are only for continuing operations. These numbers were already pre-released and therefore, we'll not read through them. The only additional update is the tax rate, which we have reduced from 27% to around 23%. All other elements of our outlook remain unchanged. With this, I would like to end today's presentation, and I open the line to your questions.

[Operator Instructions] And our first question comes from Tom Narayan at RBC.

Yes, Tom Narayan, RBC. So first on tires, what happens to tire margins once OE comes back? Presumably, you're benefiting from better margins in tires as a result of more replacement market share relative to OE. And then could you give us some color on your EV tire market share? And would this increase your tire margins? Or decrease since it will likely be more OE exposed, especially early on? And then on automotive, some OEMs, especially in the premium side, have been benefiting from better price/mix given limited supply. I guess the question is how much does this translate to better price/mix for your business? Would there be more content per vehicle? Or does this really not help you guys and maybe it just goes to the OEM?

Thanks, Tom. First question, tire margins. When OE comes back, well, you would have to do yet a type of a ceteris paribus comparison of what we expect for next year. And what we would see is, on the pass-through clauses, we have a positive effect on the OE prices as the raw material price increases with the delay from raw material price increase to finally passing through to the price increase to the -- OE will be positive. So if we see an increase in volumes of the OE next year, it is definitely on a better margin than what we see this year as this additional pass-through process will help to increase the pricing on the OE side. And the EV, profitability is above the average profitability of our tire business. EV tires allow for differentiation. EV tires are specifically optimized for volume resistance. At the same time, braking distance shall not be compromised. We have the higher weight to carry. And all this together allows, with this differentiation, to get better margins from our customers. And thirdly, OE price/mix, their optimization of their sales now to the higher-end cars, where they have higher margin. Actually, it is for us, not positive on our margin as we do not necessarily earn more on parts sold to the S-Class as the -- to earn on products sold to the A-Class, just to give an example of one customer. In the end, it is all the same sales organization which we are seeing. The positive effect on us is, though, at least partly that the content per vehicle for us, per vehicle sold is, in some cases, higher because our share in high-end vehicles is higher, absolutely higher than it is in lower-end vehicles as they have more of our product. So the outperformance we saw before of about 7% regionally adjusted is partly driven by this. But again, this is a top line topic. The average margin of this additional business is not higher than the average margin we have in the rest of the business.

Okay. And if I could just follow up on that EV tire profitability point. I guess the issue would be early on, wouldn't most of the EV tires be OE and far less replacement given that it's such a nascent market? And with that kind of crimped margins, just simply because initially, it's more OE and less replacement?

Which is true. Yes, this is true. But in there, the message is right. I mean I'm comparing OE margins non-EV with OE margins for an EV and replacement margins for non-EVs and for EVs. We see, by the way, now more statistics, which show that -- so therefore, the replacement tire market will probably be faster coming that indeed, on the electric vehicles, the use of the tires is higher than we see on classical vehicles. So therefore, the move into the replacement tire market should be faster than we see this with combustion engine tires.

And our next question comes from Gabriel Adler at Citi.

Wolfgang, Bernard, it's Gabriel from Citi. I've got 3 questions, please. My first is on the auto EBIT guidance. When I look at your guidance for the auto division, even at the upper end, it implies an EBIT margin in Q4 of around negative 6%. My question here is, when do you expect to generate a positive margin again in the auto division? And what currently gives you the confidence that the business is on track to reach that 6% to 8% midterm target that you set in the CMD last year? My second question is on the pricing discussions that you mentioned in your presentation. Maybe you can just give us an update there on the discussions that you've been having with your customers around price increases and price recovery. What really gives you confidence here that you will be able to recover some of that cost inflation next year? And maybe you could help us understand roughly what percentage of these costs you think you can realistically recover. And then my final question is back on tires and price/mix. The price/mix in tires, it looked like it was probably strong enough to fully offset raw mats in Q3. Is there any reason this level of price/mix wouldn't continue into Q4 and cover most, if not all of the EUR 250 million raw mat headwind that you're forecasting for next quarter?

I think if I respond on the first 2 questions together, because actually, your question, when is the auto business -- or probably, is the auto business, indeed, in a position in the midterm to achieve the 6% to 8%, looking at the extra margin? And the answer is a clear yes. I still confirm that we have 3 elements which will have, first, volume. We have this now very rough number, 20 million cars per quarter now. We see that the demand, the end consumer demand is significantly higher. So if you take into account as well that the supply chain is basically empty, most probably now the numbers, days on hand for retailers and wholesalers in the U.S., massively down from normally 60 days to 10 to 15 days. So this, on its own, is basically more than 10% annual increase of demand just to fill up the pipeline. Example now, yes. So volume will be one driver. Secondly, the restructuring will show its effect in 2023 and later, not only the 1 year and later. And the third thing, and this was your second question is the price in Q4 now includes already significantly higher impact from price increases of the semiconductors, which we are facing. Logistic costs are with special logistic costs continuing in Q4. And we see -- we discussed it in the last call and in-between. We see this volatility in our production to adjust always to the very short changes in call-offs from our customers, which is another -- as we've said, another more than EUR 50 million, probably to EUR 70 million. Now these costs are still in there, and they are not compensated yet from discussions and price adjustments to our customers. And yes, we are -- in these discussions, we have started this discussion some weeks ago. We are in this discussion. And we have to find solutions with our customers to make sure that these costs can be passed over. Finally, I think they have to be passed over to the end consumer. We don't believe that they will stay there only for half a year or so. They -- we -- obviously, logistic costs will fall away as soon as the chip crisis have -- chip prices still will stay on a higher level for some time, and this cannot be borne by the supplier. Now taking these 3 elements, restructuring, volume, pricing, I think we are still on the right path to achieve the 6% to 8% return. Price/mix tires, we mentioned that the price increase is 0.5% of the price/mix, which is a nice 8%, which we saw in the third quarter. The price element is, during the year, increasing. We see a further positive trend in Q4. Hence, Q1, again, we'll be required to pass all these raw material costs finally to the end consumer if the raw materials stay on this extra level and we have to do this, meaning we have to do price increases again in the beginning of the year to compensate for that.

Okay. Can I just follow up there? So is it possible that you could fully compensate the EUR 250 million raw mat headwind that you're guiding to in Q4 then if there are further price increases to come through in the next few months?

Yes, this is our intention. As we have always done in the past, raw material price increases in tires have to be, in the end, passed over to the end consumer. And we have the full intention to do so.

And our next question comes from Giulio Pescatore, Exane.

I want to circle back on the automotive guidance. You -- of course, it includes a step-up in R&D cost. Can you maybe help us understand if the previous guidance of EUR 450 million to EUR 500 million, I believe it was -- ex R&D for ADAS is still valid and we're going to see a significant step up in 2022?

And let me just check here with the room, I did not fully understand...

There are -- Giulio, are you asking if the R&D amount will also -- R&D will occur between '21 and '22? Is that what you're getting at?

Yes. If the guidance is still valid, the indication you gave for the group so far as it was.

Sorry, now I understood. The guidance for this year was for the advanced driver assistance system specifically to have this increase of EUR 200 million to EUR 250 million. Now we will not realize all of the bit. Actually, was including 2 elements. One element was internal, additional R&D buildup for specific topics, where internally we can get a step further. Roughly half, well, nearly half of it and the other half was basically 4 additional, well, joint ventures, cooperations, where there are new technologies which we want to be close to and which we want to be able to use without believing that we can invent all of this ourselves or should invent all of this ourselves. Now what we want to do internally, we are quite well on our path on these cooperations, joint ventures. It is not going as fast as we believed 9 months ago. Still on its way and it will come, but it might come a couple of months or even 2 or 3 quarters later. And therefore, guidance for next year is still around -- as I would see at the moment, around this EUR 200 million, EUR 250 million. While at the moment, it's EUR 100 million to EUR 150 million. So there will not be another additional step-up. But what we did not achieve this year in additional investments, let me call it, investments in R&D and in the technology probably might be done next year to achieve this EUR 200 million to EUR 250 million. This is a preliminary number, not finally -- the budget for next year is not finally decided on. And the volume we will need is not finally clear. But there might be -- what we did not achieve next year might move over this year and next year.

Okay. And just about these delays. I mean we are seeing the market moving really quickly on ADAS. We see new players coming in, We're seeing consolidation of players. Are these delays causing you some concern when it comes to market share and winning new business? Because of course, you're doing some clear progress in display. You're doing progress on braking. But we're not hearing a lot of progress being made on ADAS when it comes to new orders. Is that an area of concern for you?

No. Actually, the targets where we want to do the cooperation and these joint ventures closer, getting to these technologies. The targets are there. We know them. We talk to them. It is just to the finalization. It takes somewhat longer than we had hoped for.

And our next question comes from Thomas Besson, Kepler Cheuvreux.

It's Thomas with Kepler Cheuvreux. I have a few questions as well, please. I'd like to make another attempt at the Q4 implied margins. I'm not sure I understood your answer. So the implied margins for both rubber and automotive look particularly low. So I'd like to know how much cushion you effectively put in this guidance. I know the ranges are quite wide in terms of volumes for the quarter. But still, looking at the -- even at the upper end of what you guide for, it implies a major step-down, even adjusting for the one-offs included in the Q3 margins. The second question is trying to come back as well to how you get eventually to the midterm 6% to 8% margin, the pace of improvement in automotive. I mean so you're going to start up minus 2%, minus 2.5% for this year. And you've explicitly said that the improvement in 2022 would be moderate. So by -- let's say, if you assume that the restocking effect eventually happens at one point in H2 next year and in 2023, do you believe that with volumes in 2024 or 2025 back at 2019 levels, we should be then, by 2025, I mean, at 6% to 8% for automotive margins? And lastly, my third question, more philosophical question probably. There seems to be almost a fight ongoing between automakers and suppliers currently in terms of trying to effectively recover prices or in terms of not necessarily talking as much as would be possible to improve a complex situation. Do you believe that there could be, effectively, some improvements in the communication between automakers and suppliers, knowing what you've gone through in terms of stop and go and what you've gone through in terms of being able to supply semiconductors at a higher cost for you to your customers?

Well, regarding the cushions for Q4, as you call it, Thomas, if I look at October in automotive, we saw a little step-up in sales, but we did not see a significant step-up in sales volume. So I would not feel that there -- as you are rightly saying, there is a wider range, obviously now in the guidance, which is already -- and we are already in November. But I think within the range of this guidance, we will be. On the cost side, it is including the higher cost for the semiconductors, which are stronger in Q4 than they have been in Q3. And Q3 had this -- if you add those 2 EUR 30 million factors up, which we had in -- VNI and AMS had this type of headwind from these spinoff-related onetime positives. For the rest, it's a question -- if you want to do the bridge, it's a question of leverage on the respective lower or higher end of the guidance. Same is basically true for the rubber business. There, I think October was quite okay regarding this guidance. So probably we would end up more in the upper part. This is my actual -- as I actually see it in the upper part of the guidance, but we would -- I think we will stay within this range as well as the guidance, which is accepted, quite a big range. While the margin recovery, as I mentioned before, there are these 3 elements which we see, restructuring, volume, prices. And we don't expect for next year to have already this very strong volume increase. I think what IHS is forecasting for next year seems to be realistic. But if we talk midterm until '24, '25, we see a good chance to come back towards the 2019 volumes. And this should be sufficient of a driver to get into this 6% to 8% range together with the restructuring and together with the price recovery, the cost recovery, which we need for this higher input cost. And this leads to your fourth -- third question. You called it a fight between suppliers and OEs. I think we would not call it a fight, but there is a strong discussion ongoing among us and our customers. In principle, I think there is an understanding that this cost base, it's not the cost base which is reflected in our actual costing. But yes, it is always a question how much of this additional cost that the suppliers, in the end, will be accepted or will be negotiated with the OE and this process is ongoing. It's very intensively ongoing, as I said, started already some weeks ago, and too early to give any comment on that.

Our next question comes from Jose Maria Asumendi at JPMorgan.

Wolfgang, Bernard, Jose from JPMorgan. A couple of questions, please. I just want to go back into the VNI. And I mean, first, can you comment a little bit by region or which of the regions are you seeing coming back quicker to stronger revenue growth post the semiconductor disruption we had in Q3? Which region are you seeing coming back to the stronger revenues? First question. Second question, can you talk a little bit more about AMS and VNI? I'm just trying to understand, a bit better, the task for the next 12, 16 months. Maybe you can address this -- maybe differentiate a bit more on these 3 buckets that you have, restructuring, volume and pricing? When you look at the AMS and VNI, is this more restructuring in AMS versus VNI? So which are the biggest sort of drivers within these 3 categories within AMS and VNI? And then the third one, just again coming back to the fourth quarter. Are we looking at sort of revenues more in line with Q2 or slightly below Q2? Is that how we should be thinking about it? I mean, you're talking about not a major revenue recovery, Q4 versus Q3. Is that maybe the right way of thinking about it, sort of the Q2 level, slightly below that?

Could you -- Jose, could you repeat the last question? I did not fully understand it.

The last one, when you look at the revenue profile for the fourth quarter, you're saying that there's not a major uptick. I understood there's not a major uptick on AMS and VNI in Q4. How do we think about that revenue profile in Q4? Is it sort of virtually up versus Q3 but maybe below Q2? Is that probably the best way to think about it for auto?

It's a little bit hard to understand here. Jose, if you talked about -- I'll start with the last question, if you talked about the volume. Volume is -- our expectation, this is the guidance more moving towards the Q2 quarter. Margin is below anything we saw in the Q1, Q2 or Q3. And it includes now not only the special freight cost, but as well, the price increases for the semiconductors and there's more volatility in the production. If we look at the regions for the growth recovery, for next year, we would expect that Europe is -- as North America is nicely recovering and is the one who is in -- late in the second half of the year, more in Q4 is finally one which is showing the growth. But then as well, China, as they see this last month as well, on a weaker level. We see as well that China has a potential to pick up.

And then for the medium term, as we look at AMS and VNI, do you think restructuring is a bigger boost to earnings within AMS? Or is it within VNI? Like where do you think restructuring is going to be the bigger boost to margins?

Well, the bigger boost is in VNI and specifically the whole cluster business in the end, failing out of the cluster business is cost-wise corrected with the restructuring.

And final one, when do you expect this growth to accelerate within AMS and VNI? When do you expect these outperformers to [ local ] production to pick up? Is it sometime in '22? Or is it more in '23?

We see this already in '22 already in VNI. So we have less burden from the cluster business, which is moving down. We see orders for the brake business, which are starting -- in the U.S., which are starting in AMS as well next year. So the outperformance is there next year and the 2% to 4% is our expectations for the years to come.

And our next question comes from Horst Schneider at Bank of America.

It's Horst here from Bank of America. I've got 2 questions. The first one that relates a little bit to the question that has been asked also by Thomas on this Q4 and the sequential development. So if I get it right, you forecast -- despite you're in line with IHS, you forecast kind of sequential revenue decline. So I just want to understand what is the sensitivity of earnings to revenues. I mean we can, of course, debate volumes, but I also don't know what kind of outperformance you assume basically for Q4. So maybe that's the first part you can answer, what is about the outperformance? And then second, what is the sensitivity of revenues to EBIT? And why is there a reason to assume declining revenues Q4 versus Q3. And then maybe a general sort on outperformance. I mean we saw it, not bad in Q2. It was actually quite strong because of the year-ago basis. And then also now Q3 was pretty good. So I don't know, you have got this 2% to 4% outperformance guidance in place. Is that, as a framework, we should work with also for next year? Or because we have got change in mixes, for example, the outperformance should be weaker in 2022?

The Q4 sensitivity on profit level regarding to sales, we take leverage of around 30%. This is what we, I think, have seen in the last quarters. And this, I think, is the right number to assume for the fourth quarter. I think your question was specifically for the fourth quarter there. The regional weighted outperformance for Q4, the assumption here is basically around 0. So if we are somewhat better, the Q4 numbers would come more -- somewhat more to the upper end of the guidance. But let's wait and see. Again, it is not so easy at the moment. It's still a very volatile environment and predictions even in November are not completely safe for the rest of the year, specifically as we're regarding locations of -- production locations of the OEs, which are not fully transparent to us at the moment. And yes, for the regional outperformance, the 2% to 4% is what you -- for -- if you are on a business area level, which you should assume, and those numbers which we have given also in the Capital Markets Day, basically a year ago as well on our action fields, those numbers, in principle, are valid.

Okay. I mean it's a wide range, 2% to 4%. But anyhow, I don't want to be greedy. But then if I get it right, on the 0% outperformance for Q4, you admit that this is just a kind of measure of precaution. It's dependent on planned holidays, et cetera. But I mean, also the [ counting ], as they have got shorter drives, so if they can, they produce longer. So there is a chance that there's no early plan for the days and the outperformance should be bigger. There's no reason to assume that it shouldn't be also 2% to 4% maybe in Q4. It is possible, technically, right?

You can make that point for us, I wouldn't contradict. But I mean there might be as well, this is what -- this is what, at least, I have thought. There might be as well, thinking of an OE that volumes -- anyway, there's a shortage as well in Q1. And then you might as well shift some start to next year and leave this year as it is weak with the demand, so wait and see. It is not as straightforward, I think, as you were assuming in your question at the moment.

Yes. Okay. Then the last one, then I have a more specific one. I remember last year, maybe had the call on Q3. You were guiding for this lower R&D reimbursement in Q4 last year. And I was hoping all year that we're going to see, this year, in Q4, a nice R&D reimbursement, but it seems that this is not happening. So I don't know, it has been postponed for some reasons again? Or it's -- I don't know, or some other reasons why it's just not showing up in Q4 seemingly?

It was more equally distributed this year over the year, starting already in Q1. And we saw a more equal distribution than we have seen it in, not last year, but the years before. So overall, the quota is not really changing, but it was more on an equal distribution in this year than it has been in the years before, in the prior, prior years.

And our next question comes from Christoph Laskawi at Deutsche Bank.

The first one will be on a bit of the sourcing strategy for semis and the difficulties to pass on the prices. In the current environment, are there discussions that you -- the OEMs are setting up, say, buy-in programs, as Dave mentioned, sourcing semis directly and passing them on to you and in that scenario, they would also take the price risk? Is that something that you are currently discussing as well? And if yes, how quick could it be implemented? And would you welcome a scenario like that? That's the first question.

Actually, the sourcing of the semiconductors and then the additional functionalities, which we basically add to them by building them in our products and adding our software is something which is proprietary and which is part of our differentiation to competitors. So therefore, it is not in our interest that the OE goes directly to the semiconductor supplier, buys the chips as directed by, for example, and say to Conti, "Well, now do what you want to do with the chip and then deliver the product to me." We do see this in the one or other case, but we are not seeing this to become even if the one or other talks about it, but at least for our products, not to become a widespread concern, OEs are doing this directly with the semiconductor maker as well as the specific conditions for the semiconductors, which we are buying and then delivering not as a semiconductor as it was, but added with our additional features, as I might call it, is something which we can do but with the specific specifications, not something which necessarily the OEs could do directly. But again, it's not in our interest that this would happen and it is not a strategy which we are pursuing.

And in the current environment, is the share of price escalation clauses, outside of basic raw materials that are usually included in contracts anyways, also increasing? Or are the OEMs pushing against putting in more price escalation clauses?

Well, at the moment, we are discussing these cost increases, which we are seeing with our customers, as mentioned before. In the midterm, more strategic type of discussion, which we are having internally now -- I think, I mentioned in the last already, there's a big project which is doing lessons learned from the situation which we are, as an industry and as Conti is specifically in, and this includes now -- the mid-results of this project include a multitude of 8 topics. And one is, yes, the question of how to more harmonize the potential volume and the secured volume from our supply chain to the requested volumes from our customers. And obviously, this was not -- at the moment, at least, we don't have this harmonization as we see. And potentially to better react on future variations as we see it now, we need more secured guaranteed capacity at the supplier. And then the question is, obviously, who is finally taking the risk that this capacity might not be used, and by that, there is additional cost. All these discussions are now started in our industry from us with our customers, with our suppliers, just as one example. There are other topics which have to be improved in the industry overall, which is probably volume forecasting and -- but yes, it's a topic, obviously, we are strongly working on and we try to resolve within the next year to come to terms on all sides of our business, which are, by itself, inherent logically and harmonized.

And one -- sorry to come back -- sort of related to your answers on the midterm margin. You stressed the restructuring payback more for '23 onwards. Is there anything we should already expect for '22? I guess, in the previous comments, you have highlighted that there should be a slight positive, although not a significant one already next year?

We see, already, from the EUR 850 million, which we said should be materializing as gross cost reduction. And we see about EUR 200 million to EUR 300 million next year already.

And the next question comes from Philipp Konig at Goldman Sachs.

My first question is on your automotive order intake. Year-to-date, you have recorded order intake of around EUR 13 billion, which is on EUR 5 billion in Q3, which should annualize around EUR 20 billion for the year. As we think about the coming years and the share you want to take in your segments, can you give some indication of what type of intake you're expecting given your technologies? And is EUR 20 billion a sort of number you're happy with as we move into the coming years? And then my second question is more near term. You already mentioned that October volumes were a bit better than Q3. I was just wondering, has that also translated into an improvement in the volatility of the call-offs and has it been an improvement in your efficiencies and cost base?

Well, I think EUR 20 billion, if there was EUR 20 billion order intake this year, this would be okay to support the type of midterm which we had guided at our Capital Markets Day. And that's why -- was basically the assumption of those -- of the answers to the questions, are we on a path to achieve this 8% to 11% on a group margin, respective, 6% to 8% for automotive. So this is okay. We don't worry about that. October numbers, yes. If volumes go up, we talked -- I talked about the leverage. This -- about 30% leverage. This is true in both directions. So if volumes are getting better, this leverage will show. The overriding topic, actually, in Q4 is though that these cost increases for the semiconductors are now significant in Q4, felt more -- significantly more than it felt in Q3. This is the main reason for this lower profit forecast. And actually, this is all we are discussing about with our customers at the moment, what fair share of these additional costs stays with Conti and what fair share goes to the OE.

And this concludes today's Q&A. I will hand back to the speakers.

Thank you, operator, and thank you, everyone, for participating in today's call and for your great questions. As always, the Continental IR team is available to ask your -- if you have any remaining questions. With that, we would like to conclude today's call. Please stay safe and healthy. Thank you, and bye-bye.

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.